Economist Forecasts Low Ethanol Profit Margins in '13

Economist Forecasts Low Ethanol Profit Margins in '13

Ethanol markets complicated by drought show signals that most RINs may be used in 2013

The drought – a sore subject for many sectors of agriculture this summer – will continue to have far-reaching impacts on many markets, including ethanol, which is showing signs that Renewable Fuels credits will make all the difference in 2013-14.

The next two years will provide new market conditions for ethanol producers, according to a recent policy brief from Iowa State's Center for Agricultural and Rural Development. Bruce Babcock, paper author, says higher corn prices will result in lower profit margins and tough decisions regarding ethanol credits.

Ethanol markets complicated by drought show signals that most RINs may be used in 2013

The credits, or RINs – Renewable Identification Numbers – allow ethanol buyers to "bank," or store, excess ethanol use to meet Renewable Fuels Standard obligations.

Babcock says the drought situation will mean that owners of banked RINs will use them when they have the greatest value, either in 2013 to offset current high production costs, or in 2014 to offset low ethanol prices.

Babcock estimates that most will use the credits in 2013 due to the E10 blend wall and high production costs, but that could depend largely on sugarcane ethanol and the market's return to normal.

"If, as seems likely, imported sugarcane ethanol is used to meet the portion of the advanced biofuels mandate that is not met by biodiesel meeting its own mandate, then almost all the banked RINs should be used in 2013," Babcock writes. "This result assumes that corn yields return to trend-line levels in 2014. If sugarcane ethanol is not imported to meet the advanced mandate, then fewer banked RINs will be needed in 2013 to offset heavily discounted ethanol prices."

Babock says the RINs increase the feasibility of meeting the 2013-14 RFS mandates and also keep expected prices low. But, he notes that low future prices depend on the assumption that heavily discounted ethanol will incentivize more consumption.

"If this additional consumption does not materialize, then it seems that EPA will have no choice but to waive conventional ethanol mandates in 2014 because mandated consumption will exceed the ability of consumers to use ethanol as a fuel," Babcock warns.

For more information on RIN use in the coming year, click here to read Babcock's brief.

TAGS: Regulatory
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